PACC Offshore Services Holdings Ltd

PACC Offshore Services Holdings Ltd ("Posh") is offering 252,020,000 shares at S$1.15 each. The prospectus is here. The international offer will have 212 m shares and the public offering will be 40m shares. Separate from the offering, Cornerstone investors have subscribed for 85.605m shares. Depending on the demand, there is an over-allotment option of another 46.125m shares for price stabilization. The Company will have a market cap of around S$2.038 billion. The IPO will close on April 23 at 12pm and starts trading on April 25.

Principal Activities

Posh is the largest Asia-based international operator of offshore support vessels and one of the top 5 globally with 112  diversified OSVs with the breakdown shown below. It also has one of the youngest AHTS and PSV fleet, which means they are more fuel efficient and environmental friendly.

Financial Highlights

The table below shows the audited performances for the last 3 years. While it is impressive that even though revenue has stagnated, the margins has actually improved as shown by the increase in net profit over the same period. The question to ask is why have the revenue stagnated? Is it due to falling chartering rates? What is this Other Operating Income that has increased so substantially during this period? Is it sustainable?

Based on the total number of shares of 1.82b shares and assuming a forex of 1.25, the EPS for 31 Dec 2013 is around Singapore 5.04 cents. At the IPO price of $1.15, the historical PER is around 22.8x. This is really not cheap. According to the research report by BOS, the forward PER (using the IPO price of $1.15) is around 8.9x. Although this is possible looking at the CAGR  67.4%, i am frankly not sure as I am not privy to the assumptions used. The report is sourced from Singapore Stock Market News.

According to note 22 of the audited financial statements, the other operating income is as follows. Not exactly impressive or sustainable to me.

It is also interesting to note that the Company has obtained "charter-free" valuations for the vessel that it owned. This typically means that if the Company sells the vessels with an existing chartering contract, it will fetch a higher sale price. However, having said that, there is a big "goodwill" asset of US$295m sitting in the balance sheet which i don't like. Why am i paying for that "goodwill"? 

What I like about the Company

• Large diversified fleets provide capability for value-added services and comprehensive solutions to clients.
• Proven international track record in many countries and region globally. 
• Strong links to the Kuok empire. The empire includes names like Kerry Properties Limited, Shangri-la Asia Ltd, SCMP Group, WIlmar International, PPB Group Berhad and Malaysian Bulk Carriers Berhad.
• Established reputation with Oil & Gas players and have long standing relationships with Saipem, Hyundai Heavy Industries, SapuraClough Offshore.
• Highly experienced and proven management team. CEO has more than 40 years of relevant experience. It is professionally run and has no family members sitting anywhere.

My Concerns

• The Company has been on a huge expansion track. Any change in macro demand will result in over capacity and may cause a drop in the chartering rates
• Stagnating revenue. The profit growth seemed to be due to "Other Operating Income" of asset sale and forex gain. Are they sustainable?
• As a result of expanding, the Company will be constantly in need of cash and the growth has been largely financed by borrowings. This will probably mean that dividends may not be paid for the foreseeable future
• Robert Kuok is a shrewd businessman. Like all true entrepreneurs, he will out to max out the value he can get from the IPO, which probably mean the Company is fairly or over valued.
• The NAV per share (before accounting for goodwill) is around $0.81 versus the $1.15 paid by investors.

Future Growth Strategies

The Company intends to use the net proceeds from the IPO to pay down debt, expand fleet and for working capital. Some of the future growth strategies include:

• Broadening fleet diversification 
• Expand into deep water offshore accommodation
• Expand into new geographical markets that has significant growth potential

Shareholders

Post the IPO, the number of shares will be 1,820,000,000. The Company continued to be tightly controlled where substantial shareholders Kuok Family will hold about 75.8% of the Company. 

Pacific Radiance

My gut feel is that this counter will trade like Pacific Radiance whereby you will need a longer time for it to trade towards its potential provided it can execute its strategies and continue to grow its EPS. My IPO write up for Pacific Radiance is here.

My Valuation

This set of peers is downloaded from Capital IQ based on last Friday's closing price

Since this company is a top 5 global company, it should technically deserve a premium over its peers. However for conservative and given the pricing being priced at the lower end of the book building, i will be more conservative and use the Pacific Radiance and Ezion forward PER of 10x as a benchmark.

If POSH trades towards the forward PER of 9x-10x, the fair value range should be around S$1.16 to S$1.29, representing an upside of between 1% to 12%. My gut feel is that the debut should be around $1.15 to $1.20 given the large IPO float.

Conclusion

Given the large float, muted sentiments and financial statements that i don't really like, i will give it a 1 Chilli rating as i think it is already fairly priced. How it will perform going forward will very much depend on whether the Company can execute its expansion plans and it is too early to pay the current price for that potential. 

Buy if you like but don't expect too much fireworks. Be contented if you get a 6%-8% upside on debut but any weakness in sentiments will probably mean a weak debut. 

Happy IPOing.